Investment appraisal in actionA Syngenta case study

Page 3: Investment appraisal

In 2008 Syngenta was faced with a major investment decision. As the Amistar range moved through its product life cycle, maximum capacity was approached. Syngenta could not produce more Amistar without investing in its production facilities. A proposal was put forward to expand production through a £150 million investment at the Grangemouth site in Scotland. The company needed to decide whether increasing production would be financially viable and a worthwhile investment.

Rationalising the investment

Syngenta needed to be clear about the initial arguments for and against the proposal:

AGAINST

The Amistar range was already well into the maturity stage of its product life cycle. New products could come onto the market that would lead to declining sales.

Patent protection ends in Europe in 2010 and in the USA by 2014. Companies in India and China are liable to start producing cheaper substitutes that could reduce Syngenta’s sales.

The world economy was in a serious recession in 2008. There is a case for putting expansion plans on hold until the global economy becomes more stable.

FOR

Amistar is a broad spectrum fungicide with applications for 120 crops in more than 100 countries. Demand was increasing, especially in Latin America. This investment would help to meet that demand, increasing both output and productivity by 50%.

Azoxystrobin, the active ingredient in Amistar, can be used as a compound in many related products. New developments, potentially leading to new patents, could extend the product life cycle.

The Grangemouth facility already had the technical expertise and resources for a complex manufacturing process.

Global demand for food is increasing and tends to be price inelastic. This will maintain global demand for fungicides.

Making informed decisions

These arguments set out some of the broad reasons for making the investment: that demand for Amistar would continue to grow and that the investment would lead to efficiency gains by increasing productivity. It was also technically feasible. Staff at Grangemouth had the essential experience and expertise. The plant had an outstanding safety and environmental record. It has an ideal location, on Scotland’s ‘chemical strip’ alongside other chemistry-led companies and a range of key suppliers. The arguments against the investment set out some of the potential risks and downsides.

However, to make an informed decision, Syngenta had to carry out an investment appraisal. An investment appraisal involves determining whether the inflows represent a sufficient return on the original investment. This involves looking at the financial implications of the investment decision. This considers the short-term issue of funding the investment and the longer-term financial implications, in this case over a ten-year period (2008–2017). To do this, the company needed detailed financial data to assess whether the investment would produce value for shareholders.